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Pilgrim's Offer for Hillshire Brands Is No Pig in a Poke

The push by the poultry producer's parent to globalize branding is the impetus behind the bid.

Who knew meat processing could be so interesting? The $5.6 billion buyout offer by Pilgrim's(NASDAQ:PPC) for Hillshire Brands(NYSE:HSH) is intriguing not only because it would require the owner of Ball Park hot dogs and Jimmy Dean sausages to give up its own takeover bid for Pinnacle Foods(NYSE:PF)but also because Pilgrim's owner JBS(NASDAQOTH:JBSAY) just announced it is spinning off its Brazilian pork, poultry, and food-processing operations.

When Hillshire announced its play for Pinnacle, its CEO justified the $6.6 billion offer by saying, "Meats go with vegetables, sandwiches go with pickles," though it didn't really sit well with investors who worried about the $2.5 billion in Pinnacle debt it would be assuming. But two complementary meat companies go together even better, and Hillshire would gain greater access to Pilgrim's supply of pork, poultry, and beef.

In return, Brazilian meat-packing giant JBS would further its push into branded meat products, which have more profit potential than selling private label meat products to supermarkets.

The U.S. pork industry is in the midst of a devastating virus outbreak that's literally decimating the pig population. Some 10% of all pigs have succumbed to the porcine epidemic diarrhea virus, or PEDv, driving pork prices to record levels. Beef prices as well are hitting record highs due to drought, forcing feed prices higher coupled with smaller cattle herds that have hit 63-year lows.

JBS acquired 64% of Pilgrim's in 2009 out of bankruptcy court for $2.8 billion including debt, and subsequent purchases have put its stake in the poultry company at over 75%. Two years before that deal, JBS bought pork processor Swift. Now it's trying to snatch Hillshire Brands, and if successful, will have a full stable of well-known brands that provides it with far greater growth potential.

Hillshire itself was also seeking to leapfrog its way to growth by buying up smaller rivals. Last September, it acquired gourmet jerky maker Golden Island for $35 million and a few weeks ago said it was buying Van's Natural Foods for $165 million. The pitch for Pinnacle, then, was a significant step up and certainly its largest acquisition attempt since being created from the spinoff of D.E. Master Blenders from the old Sara Lee company.

Yet as we saw last year when Smithfield Foods was acquired by Shuanghui International Holdings (now called WH Group), the rise in global demand as wealth increases in emerging markets is creating an impetus for these multinational buyouts. Last year, JBS bought up pork and poultry operator Seara for $2.7 billion, and is including them in the spinoff.

Further acquisitions have always been on the table, though, as JBS's CEO said last week it had the balance sheet strength to finance more deals and was actively seeking opportunities. Since it's been pursuing Hillshire since at least February, it's not surprising it sprung the offer, particularly as it gives investors a choice to consider.

Considering they were worried about the debt Hillshire would be taking on and the fact JBS has generously offered to pay the $163 million breakup fee it would owe Pinnacle, it seems to be a no-brainer which deal investors should choose.

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